An Age of Creative Destruction

‘Gentlemen: You have undertaken to cheat me. I won’t sue you, for law takes too long. I will ruin you.” Thus Cornelius Vanderbilt writing to business partners who had exploited his absence to gain control of one of his companies. He was as good as his word.

The nature of both ruin and success is the subject of “American Colossus,” H.W. Brands’s account of, as the subtitle has it, “The Triumph of Capitalism” during the period 1865-1900. Mr. Brands paints a vivid portrait of both this understudied age and those industrialists still introduced by high-school teachers as “robber barons”—Vanderbilt, Andrew Carnegie, John D. Rockefeller and J.P. Morgan. Together these men of the 19th century laid the foundations that would allow the use of innovations that we think of as modern, such as trains and automobiles, on a massive scale in the 20th century.

“Colossus” also reminds us of something more subtle: the terrifying difficulty of remaining at the top once one has arrived. Vanderbilt, for example, seemed doomed to be sidelined during his lifetime. He was a “water man” and remained devoted to the steamship even as railroads threatened to relegate river transport to the status of the fax. His hostility to trains was so great he referred to them simply as “them things that go on land.” But the Commodore eventually admitted to himself the looming obsolescence of the river highway—just in time to corner the stock of the New York & Harlem Railroad in the 1860s. Thus did he postpone—albeit only for a few decades—the decline of the great Vanderbilt empire.

Rails to riches: An 1870 cartoon depicting James Fisk’s attempt to stop Cornelius Vanderbilt from gaining control of the Erie Railroad Company

As Mr. Brands relates the tycoons’ stories, he drops some anecdotes wonderfully relevant today. Many Americans these days are buying their first gold shares—but with a certain ambivalence, all too aware that the metal’s price can move suddenly. Mr. Brands reminds us just how suddenly with a description of gold’s gyrations on Friday, Sept. 24, 1869, the day the Treasury signaled the Grant administration’s intention to combat rising gold prices by putting a supply worth $4 million on the market. That day, before Treasury’s move, gold shot to $162 an ounce from $143. Then the government’s gold came online. “As the bells of Trinity pealed forth the hour of noon,” reported the Herald Tribune, “the gold on the indicator stood at 160. Just a moment later, and before the echoes died away, gold fell to 138.”

“Colossus” also reminds us just how colossally wrong bets can be. When New York’s first apartment building, on East 18th Street, was planned in 1869, the reception it received was as cold as a February wind off the Hudson. New Yorkers reckoned that “cohabitation,” as apartment life was called, would fail and that gentlemen would never live “on shelves.”

For all the pleasure that “Colossus” offers in the way of anecdote, two flaws undermine its attractions. First, Mr. Brands frames the book—and indeed all of American history—as a contest between capitalism and democracy. Democracy depends on equality, the author claims, while capitalism needs inequality to function. “In accomplishing its revolution, capitalism threatened to eclipse American democracy,” he writes.

The author’s attachment to a sweeping theme like the democracy-capitalism clash is understandable: It’s the sort of duel that Will and Ariel Durant and other producers of pageant-style history have featured to unify their multivolume works.

Still, this “wasn’t it grand?” mode of writing is imprecise. Mr. Brands laments that capitalism’s triumph in the late 19th century created a disparity between the “wealthy class” and the common man that dwarfs any difference of income in our modern distribution tables. But this pitting of capitalism against democracy will not hold. When the word “class” crops up in economic discussions, watch out: it implies a perception of society held in thrall to a static economy of rigid social tiers. Capitalism might indeed preclude democracy if capitalism meant that rich people really were a permanent class, always able to keep the money they amass and collect an ever greater share. But Americans are an unruly bunch and do not stay in their classes. The lesson of the late 19th century is that genuine capitalism is a force of creative destruction, just as Joseph Schumpeter later recognized. Snapshots of rich versus poor cannot capture the more important dynamic, which occurs over time.

One capitalist idea (the railroad, say) brutally supplants another (the shipping canal). Within a few generations—and in thoroughly democratic fashion—this supplanting knocks some families out of the top tier and elevates others to it. Some poor families vault to the middle class, others drop out. If Mr. Brands were right, and the “triumph of capitalism” had deadened democracy and created a permanent overclass, Forbes’s 2010 list of billionaires would today be populated by Rockefellers, Morgans and Carnegies. The main legacy of titans, former or current, is that the innovations they support will produce social benefits, from the steel-making to the Internet.

The second failing of “Colossus” is its perpetuation of the robber-baron myth. Years ago, historian Burton Folsom noted the difference between what he labeled political entrepreneurs and market entrepreneurs. The political entrepreneur tends to compete over finite assets—or even to steal them—and therefore deserves the “robber baron” moniker. An example that Mr. Folsom provided: the ferry magnate Robert Fulton, who operated successfully on the Hudson thanks to a 30-year exclusive concession from the New York state legislature. Russia’s petrocrats nowadays enjoy similar protections. Neither Fulton nor the petrocrats qualify as true capitalists.

Market entrepreneurs, by contrast, vanquish the competition by overtaking it. On some days Cornelius Vanderbilt was a political entrepreneur—perhaps when he ruined those traitorous partners, for instance. But most days Vanderbilt typified the market entrepreneur, ruining Fulton’s monopoly in the 1820s with lower fares, the innovative and cost-saving tubular boiler and a splendid advertising logo: “New Jersey Must Be Free.” With market entrepreneurship, a third party also wins: the consumer. Market entrepreneurs are not true robbers, for their ruining serves the common good.

Mr. Brands appreciates the distinction between political entrepreneurs and market entrepreneurs, but he chooses not to highlight it. Thus he misses an opportunity to emphasize a truth about the late 19th century that rings down to our own rocky times: The best growth is spurred by the right kind of ruin.

Miss Shlaes, a senior fellow at the Council on Foreign Relations, is writing a biography of Calvin Coolidge.